By Emma Dahl

What happens to dead people’s money? A morbid question maybe, but also an important one to ask when considering taxing the flow of money.

A friend of mine asked me recently what would happen to all this money sitting in bank accounts, and while it might seem irrelevant to most of us, to those that are planning on inheriting large sums of money, it’s an important question to ask.

Generally, where the money of a deceased person goes depends on if they held money in  joint account or listed it in a trust. Basically, if they have designated someone else on the account, the money is probably covered. If the account doesn’t designate a recipient, sometimes a judge can designate an executor or estate administrator access until the account has been settled in court, according to this article.

Accounts with Designated Recipients

For those bank accounts that have a designated recipient or a joint signer, the money should easily be transferred over to that recipient or in the case of a joint account, would likely stay in the same account as long as it was still accessible to the joint signer. If this money were transferred to another account, under a payments tax, it would just be taxed at the standard tax rate (let’s say 0.2%) on the receiving end of the transaction. For example, if you’re transferring $6 million from a deceased relative to your account, $12,000 would automatically be deducted and you would receive $5,988,000.

Comparatively, states that have an inheritance tax (Maryland, Nebraska, Kentucky, New Jersey, Pennsylvania, and Iowa) currently implement a tax rate of anywhere from 1% to 18%, depending on your relationship to the benefactor (spouses are automatically excluded and do not pay inheritance taxes even in these states). Given, the inheritance tax only kicks in on values above $5.47 million. On an inheritance of $6 million, you could pay up to $1.08 million in taxes, leaving you with $4.92 million rather than $5.988 million.

Accounts without Designated Recipients

If an account doesn’t have a designated recipient, local courts will first use the money to pay off any outstanding debts owed by the deceased and then will determine how the rest of the money will be distributed. After debts are paid off, what happens with the rest of the money varies by state. Although it might be entertaining to think about the money of the deceased gathering dust in bank accounts, unclaimed money is usually used by the state. Maryland, for example, generally gives unclaimed funds to the state board of education.

Similar to that money claimed by a recipient, because a payments tax would be applied on the receiving end of a transaction, that money would simply be taxed upon landing in whatever state-designated account it goes to. If for example there was $10,000 left in an account after debts were paid, when that money was transferred to the state, the same $20 would be deducted as above, and the state would receive $9,980.

The benefit of implementing a program such as a payments tax is that it seriously simplifies processes like this, and in some states also reduces the tax on inherited money.

Thanks to Matt Smith for the idea.